3 Alternative Investments to Protect Your Portfolio from Inflation in 2022

Zak Boca, CEO, AltExchange
 
Analysts are split on the type of inflation happening at the moment, and whether or not it’s here to stay. What isn’t debatable though is that we have continued challenges in global supply chains, material shortages, volatile material costs and a massive change in our demographic workforce, leading to scarcity of skilled labor for businesses.

All of this combined is resulting in the highest inflation numbers we’ve seen since the early 80’s, and is further contributing to the continued migration away from the 60/40 portfolio. 

Alternative investment growth driven by inflation concerns

 
With uncertain conditions and unsettling stock market volatility, many investors and advisors are looking to alternative investments to hedge against inflation.

Common alternative investments include, but are not limited to: real estate, cryptocurrencies, private equity, hedge funds, commodities, collectibles, and luxury items such as fine wines, art, and jewelry.
 

3 alternative investments to consider

 
Here are three alternative investments DIY investors should consider adding to their portfolio to hedge against inflation in 2022.
 

1. Real Estate

 
Real estate, specifically income from rental properties, can be a great alternative investment with a goal of not only outpacing inflation, but providing steady yield. This is because during inflationary periods, wages rise, and so does rent. Therefore, landlords can charge more.

In fact, in 2021 we saw rent prices for one-bedroom apartments increase a whopping 21.3%, and two-bedrooms not far behind at 16.7% (Source: apartmentguide.com). Thankfully we’re seeing wages rise, and so long as interest rates remain reasonable, we should also continue to see appreciation through demand for real estate. As the cost of materials and wages raise, so too should the value of the real estate that you own.
 

2. Private credit

 
We continue to see clear signs that the Feds will raise interest rates this year, driven by inflation numbers that we haven’t seen since the early 80’s. It’s important to pay attention if you’re still in a traditional 60/40 allocation, because many investors may find themselves being overweight long-duration fixed income.

Private credit can be helpful during low-yield, high inflationary environments for a variety of reasons:
 

1. Floating rate loans: Private credit tends to be a floating rate, which should provide investors with protection during rate hikes.
2. Improved credit quality: When rates are rising, it’s typically because demand for services is high. While a rising rate environment increases debt repayments on borrowers, default rates do not typically go up as a result given the backdrop of a strong economy.
3. Manager negotiated deals: The demand for private credit has never been higher, with private credit being the third largest asset class behind real estate and private equity. Asset managers can pick their deals, which often are senior-secured and may have covenants.

 
Perhaps most important, private credit deals are less volatile than their public alternatives, Business Development Companies (BDCs).
 

3. Hedge Funds

 
As Steve Deppe, CIO at Nerad + Deppe Wealth Management said, “This year will be volatile.” Hedge funds are interesting during volatile times, as hedge fund performance is generally not compared with market benchmarks. In other words, hedge funds have a unique ability for alpha creation as markets remain volatile.

PivotalPath’s hedge fund survey found that hedge funds returned 7.8% annually when rates were low (0-3% on 10-year treasury), and 12.2% when rates were high, between 3 and 7%.
 

The bottom line

 
The bottom line is, there’s a reason why 81% of Institutional Investors are planning on increasing their allocation to alternative investments (Source: EY). Among inflation concerns, economic uncertainty due to the ongoing pandemic, as well its lasting effects such as the supply chain crisis, it’s a no-brainer.

Both DIY investors and advisors need to strongly consider alternative investments to protect their portfolio from inflation.